“We’re borrowing from future returns… take what the market has given you this year.” It’s a common phrase I’ve heard in client meetings when performance is exceptionally good. And why not? Over the past few decades of falling interest rates, low inflation and recent accommodative monetary policy, a 60/40 portfolio generating 10+% returns has lately been assumed to be the norm moving forward. But all good things must come to an end, and we must take what the market has given us and move forward.
Individual investors face a challenging road ahead. Defined benefit plans have been challenged with underfunded commitments, and individual investors are increasingly bearing the risk to secure their own retirement. Those nearing or at retirement face public equity valuations near record highs, fixed income yields at record lows and inflation rearing its head for the first time in decades. Simultaneously, millennial and Gen-Z investors, projected to inherit $48 trillion of wealth over the next 25 years, are facing the daunting challenge of securing their own retirements—even if it’s 30 or 40 years from now.
Confronting these disruptive forces and capital market headwinds to meet retirement outcomes requires proper training and sophisticated portfolio construction, more than ever.
Advice is starting to fall on deaf ears … But at a time when the valuable services of professional advice and money management are most needed, why are clients so frequently looking elsewhere? Often opting to manage their own portfolios, young investors don’t believe an advisor can add value anymore. I disagree, but I do believe these investors are speaking a different language and are looking for something more from their portfolios. Increasingly, clients want to discuss investments that align with their worldview—climate change mitigation, cryptocurrencies, venture capital, direct indexing and artwork are just a few examples—and are demanding creative and diversified asset allocations to prepare for a low public market return environment.
Our industry is never shy about introducing new products, but they cannot drive the conversation. This makes the role of a fiduciary more important than ever. Education allows an advisor to not only thoughtfully embrace change but also scrutinize it through the lens of what’s in the best interest of the client. What’s needed is a clear call to action for tomorrow’s advisory relationship:
- Embrace Objective-Based Investing—Financial planning is personal and tangible, which often makes it far more engaging for the end client. On the other hand, investing is often abstract, and it’s on us to bridge the gap. Platforms for “do it yourselfers” have made investing “fun” and, debatably, understandable, but on these platforms, the investor is very much the product. Advisors need to find ways to make investing engaging for the end client without compromising the reality that we are stewarding a family’s retirement hopes, dreams and dignity—this is not a game.
- Build a Portfolio for the Future—For years, the advice community has minimized the value of investment management, claiming it all but completely commoditized. It’s easy to throw in the towel when a rising tide lifts all boats, and the past decade of strong equity market performance, falling interest rates, low inflation and accommodative monetary policy has been the perfect rationale for putting the portfolios on autopilot. Looking forward, however, advisors need to get back to basics with the portfolio management value proposition. Proper diversification, exposures to multiple risk premia and generating attractive, long-term risk-adjusted performance need to be top of mind if clients are to achieve their goals. It’s time to get back in the captain’s chair and turn off the autopilot.
- Seek alternatives (with a lower case A)—Perhaps it’s surprising when I say I don’t mean alternative investments in terms of the “that other stuff other than stocks, bonds and cash.” To invest in alternatives is to consider all alternatives—that is, to consider the entire investment opportunity available and unify your portfolio around a common goal. A good fiduciary does what is in the client’s best interest, which doesn’t always align with the path of least resistance.
Financial advisors provide a valuable service to society, now more than ever. Not only will they continue to steward their clients’ capital toward their long-term objectives, but they will also continue to educate them along the way.
True professions exist to serve a higher purpose and therefore carry a societal endorsement. Historically, our industry has disrupted itself repeatedly, but long bull markets tend to foster complacency. Now is the time to take what the market has given us but reinvest it toward smartly embracing change, redefining your value to clients, and building businesses and portfolios for a future generation of investors.
Aaron Filbeck, CAIA, CFA, CIPM, FDP, is managing director and head of UniFi by CAIA at CAIA Association. UniFi by CAIA is a learning platform dedicated to educating the private wealth management industry on alternative investments.